Vehicles cannot be repossessed by force, says Supreme Court, awards truck owner Rs 10L compensation

Bench directs RBI to take effective steps to ensure genuine compliance by financial institutions on repossession of vehicles from defaulting consumers.

New Delhi: The Supreme Court has set aside an Allahabad High Court order in a dispute over the repossession of a commercial truck, holding that a financier cannot take possession of a vehicle in a manner that is contrary to regulatory safeguards and then defend the unauthorised act by relying on the contractual repossession clause.

A bench led by Justice P.S. Narasimha further directed the Reserve Bank of India (RBI) to take effective steps to ensure genuine compliance by financial institutions on repossession of vehicles from defaulting consumers. The court said that the safeguards contained in RBI guidelines and circulars appeared to exist “only on paper”.

The case concerned Hari Dutta Sharma, who had taken a commercial vehicle loan from Cholamandalam Investment and Finance Company Ltd in March 2019 to purchase a Tata SFC 407 truck.

The finance company sanctioned Rs 10.40 lakh, of which Rs 9.36 lakh was disbursed, repayable in 75 monthly instalments. But Sharma defaulted on the loan, and due process was not followed by the NBFC during repossession.

The dispute centred on what happened on 9 April 2023. Pre-seizure notice and confiscation of the vehicle happened on the same date, whereas there has to be a seven-day gap.

Sharma said that around 1 am, four unidentified persons broke the steering lock of the truck and drove it away. He lodged a lost-article report/e-FIR the same day. The judgment records that a pre-seizure notice dated 9 April had been sent by the company to the local police station.

The company later informed Sharma through a legal notice dated 30 September 2023 that the vehicle had been repossessed and sold on 31 August. It said the outstanding dues were Rs 5.71 lakh, while the sale fetched Rs 4.50 lakh.

The loan agreement required the company to give a seven-day notice before repossession. No such notice was given to Sharma before the April 2023 seizure.

Self-help repossession can’t become ‘unbridled licence’ to seize

The Supreme Court examined whether a financier’s contractual right to repossess a financed vehicle could be exercised outside court proceedings.

It held that such a right is fundamentally a matter of contract and is not, by itself, prohibited. But contractual self-help cannot be treated as an unrestricted power to take property by force or stealth.

The court referred to the Reserve Bank of India’s Fair Practices Code for Lenders, first issued in 2003, which required lenders to avoid undue harassment, including bothering borrowers at odd hours, and prohibited the use of muscle power for recovery.

Subsequent RBI guidelines and master circulars prescribed safeguards covering a board-approved Fair Practices Code, customers’ privacy and confidentiality, fair debt-collection practices, the conduct and training of recovery agents, repossession procedures, grievance redressal for complaints against banks and recovery agents, and the use of credit counsellors. The Supreme Court directed the RBI to ensure these safeguards are effectively implemented by Scheduled Commercial Banks and NBFCs.

The judgment also referred to its 2007 decision in ICICI Bank Ltd v Prakash Kaur, which rejected forcible vehicle recovery.

SC finds Article 11 at odds with RBI safeguards

The court examined Article 11 of Sharma’s loan agreement with the finance company, which dealt with the company’s rights following a default and permitted repossession without court intervention.

The Court found several problems with the way the clause was framed.

It noted that the agreement gave the financier substantial discretion over the and sale in case of default. But it was silent on the safeguards to be followed in case of repossession, while authorising recovery agents to enter places for repossession, without laying down an adequate procedure for doing so.

The court found that the clause was not in conformity with RBI guidelines or the Indian Contract Act.

The court then turned to the actual repossession. Sharma’s account that the vehicle was taken around 1 am after its steering lock was broken remained unrebutted. The possession memo also did not bear his signature.

The court held that the company had not complied with the contractual and regulatory safeguards governing repossession. Since the contractual right to take possession was conditional upon compliance with the agreement, the court said that the right to repossess “never accrued to the Company in the first place”.

It further observed that the manner of seizure was inconsistent with the RBI’s prohibition on harassment, odd-hour recovery and the use of force. The Court said that contractual self-help could not become an “unbridled licence to seize property by stealth, by force or in the dead of night”.

High Court order set aside, RBI directed to ensure compliance

The Supreme Court also rejected the Allahabad High Court’s approach on delay. The High Court had dismissed Sharma’s petition, but the Supreme Court noted that he had approached the police on the very day he said the vehicle was taken.

There were also later traffic challans issued in January 2024, November 2024 and February 2025, even though the finance company had said that the vehicle had been sold in August 2023.

The Supreme Court said these circumstances required consideration and that the High Court should not have rejected the case on delay without examining the merits and the question of prejudice.

The apex court set aside the Allahabad High Court’s 4 April 2025 order. It did not disturb the vehicle’s sale, which had already taken place on 31 August 2023.

It directed the finance company to close the loan account and refund the Rs 4.50 lakh sale proceeds with 6 percent annual interest from the date of sale until payment. It also awarded Rs 10 lakh as compensation for mental agony and loss of livelihood and imposed Rs 50,000 in costs.

Aditya Edara is a TPSJ alum, currently interning with ThePrint.

(Edited by Sugita Katyal)